With the SEC’s pay ratio rule now in effect for US public companies, new research from Equilar suggests that large disparities between CEO and median employee pay – and therefore potential investor relations or PR fallout – are more likely to be a factor for large-cap multinational businesses.
Mega-cap companies have an average CEO pay ratio of 243:1, while small-cap companies (based on Equilar’s definition of $700 mn-$3 bn) have a much lower pay ratio of 72:1, according to the survey of 356 companies. Similarly, companies with the largest employee base have the highest CEO-median worker pay ratios: firms employing more than 43,000 employees have a median ratio of 318:1 and those employing fewer than 2,300 employees have a ratio of 45:1.
Respondents were asked about their current CEO pay, median employee pay and also to explain how they calculated the latter. Just under half (47 percent) use a component of employee cash compensation, while 21 percent use W-2 income or total rewards.
|Cap size||Pay ratio|
|Mega cap (more than $85 bn)||243:1|
|Large cap ($25 bn-$85 bn)||258:1|
|Mid cap ($3 bn-$25 bn)||138:1|
|Small cap ($700 mn-$3 bn)||72:1|
|Micro cap (less than $700 mn)||45:1|
The CEO pay ratio disclosure rule was introduced under the Dodd-Frank Act and applies to all US public companies reporting in the fiscal year 2017 onwards – meaning that public companies are including the ratio in their proxy statements for the first time this year.
‘The CEO pay ratio is not simply about CEO pay and median employee pay, although those are obviously the two inputs for the equation,’ Matthew Goforth, senior governance adviser at Equilar, tells IR Magazine. ‘A company’s business strategy, business model and employee distribution around the world are all important in the outcome of the ratio.’
Goforth adds that for the investment community, the amount the median employee earns may well be more interesting than how much the CEO earns, given that CEO compensation data is already available. He explains that it is up to companies that employ a significant percentage of their global workforce in low-income countries to explain how that effects the company’s pay ratio.
The SEC’s guidance on the CEO pay ratio rule, released in September 2017, states that companies do not need to include overseas workers in their pay ratio calculations if the total number of overseas workers is less than 5 percent of the global workforce. The SEC also states that contract workers do not need to be included in pay ratio calculations.
Based on responses to an open text question in Equilar’s survey, Goforth says companies appear to be approaching the pay ratio calculation as something that can be dealt with this year and repeated using the same formula, rather than altered each year to reflect a lower ratio.
‘A lot of comments indicate that these teams are trying to create a methodology that is repeatable, defendable and consistent, rather than the lowest ratio for this year,’ Goforth says. ‘What we’re going to end up seeing is a lot of pay ratio disclosures being made under the CD&A section of the proxy statement, but without voluntary information describing the process.’